Former Gap store on Magnificent Mile in danger of default

This decision is a red flag, signaling that the owner of the property is at risk of defaulting on the loan and may seek to restructure the debt. After losing Gap last year, the property is now 74% vacant and not generating enough revenue to cover its debt repayments. Buildings are almost certainly worth less than the debt owed on them.

It’s one of many Mag Mile commercial properties struggling to bounce back from a wave of store closures and a spike in crime during the pandemic. Retailers such as Macy’s, Uniqlo, Disney and Express have left the high street in the past two years, and the Mag Mile vacancy rate has climbed to around 25%, more than double its 2018 level, according to Cushman & Wakefield.

Gap occupied the entire three-story, 46,000 square foot building at 555 N. Michigan, opening its store there in 2000. Its lease expired in November 2020 and the store closed in January 2021.

Tourbillion, a luxury watch retailer owned by Swatch, leases the approximately 16,000 square foot building at 545 N. Michigan, but sublets its space to UGG, the shoemaker. The lease and sublease both expire in December, according to a May 2021 report from DBRS Morningstar.

It is unclear whether the Irish investment firm that owns the buildings, ECA Capital, wants to modify the loan to buy more time to transform the property, or if it plans to give up its property and move on.

Efforts to reach the Dublin-based ECA through intermediaries were unsuccessful. A representative for the special repairer, New York-based SitusAMC, did not respond to a request for comment. An officer of CBRE, who is marketing of the Gap space for rent, declined to comment.

In its May 2021 report, DBRS Morningstar was skeptical that ECA could fill the vacancy and avoid defaulting on debt.

“Given the upheaval for retailers that was building even before the onset of the coronavirus pandemic, with several notable closures in the Magnificent Mile area over the past year, the borrower may face an extended rental period for vacant space and the 2022 lease expiration for the remaining tenant could also present a challenge given market dynamics,” the report states. “In its analysis for this review, DBRS Morningstar increased the likelihood of default on this loan, significantly increasing the expected loss.”

A DBRS Morningstar executive did not respond to requests for comment.

The loan bears an interest rate of 4.7% and matures in 2027, according to Commercial Real Estate Direct. ECA borrowed the money as part of a larger $77 million refinancing buildings with the New York company Apollo Global Management in 2017.

The debt was split into two parts, with $57 million sold in a commercial mortgage-backed securities (CMBS) offering in 2020. The CEA repaid part of this debt, bringing the balance of his loan to $55.5 million. As a special service, SitusAMC oversees the mortgage loan on behalf of investors who hold bonds secured by it and other loans included in the CMBS offering.

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